Accounting Chapter 8

What is meant by a concentration of credit risk?

A concentration of credit risk is a threat of nonpayment from either a single large customer or class of customers that could adversely affect the company's financial health.

What is the difference between an account receivable and a note receivable?

Accounts receivable are amounts customers owe on account. They result from the sale of goods and services (i.e., in trade). Notes receivable represent claims that are evidenced by formal instruments of credit.

Lance Morrow cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method

Lance should realize that the decrease in cash realizable value occurs when estimated uncollectibles are recognized in an adjusting entry. The write-off of an uncollectible account reduces both accounts receivable and the allowance for doubtful accounts by the same amount. Thus, cash realizable value does not change.

The Coca-Cola Company's accounts receivable turnover was 9.05 in 2014, and its average amount of net receivables during the period was $3,424 million. What is the amount of its net credit sales for the period? What is the average collection period in days? (Given formulas)

Net credit sales for the period are 9.05 X $3,424 million = $30,987.2 million. Average collection period in days = 365 days ÷ 9.05 = 40.3 days.

An article in the Wall Street Journal indicated that companies are selling their receivables at a record rate. Why do companies sell their receivables?

The reasons companies sell their receivables are: (1) For competitive reasons, companies often must provide financing to purchasers of their goods. Such financing can result in receivables balances that are larger than the company wishes to hold. Selling the receivables reduces the excessive balance. (2) Receivables may be sold because they may be the only reasonable source of cash. (3) Billing and collection are often time-consuming and costly. As a result, it is often easier for a retailer to sell the receivables to another party that has expertise in billing and collecting receivables.